Gov’t Taking New Steps to Stop Food Stamp Fraud

Measures include increasing states' power to investigate people who frequently lose cards

May 24, 2012, 5:18 pm EST | By InvestorPlace Staff

Food stamp fraud is an expensive problem, but states have often had their hands tied in how they handle it. The Agriculture Department is now seeking to give them more weapons.

Today, the department announced it was proposing rules that would allow states to demand formal explanations from people who seek more than three replacement cards a year. Those who refuse to comply can be denied further cards.

Why is the government doing this? While the biggest source of food stamp fraud comes from retailers who allow customers to turn in their benefits cards for lesser amounts of cash, they are seeing an increasing number of people selling or trading their benefits cards, including over web sites like eBay (NASDAQ:EBAY) and Craigslist. Overall, food stamp fraud costs the government $750 million a year, on a $75 billion program.

Up until now, states were limited in how they could go about investigating fraud. Unless they were confident that an individual had committed fraud, there was little they could do.

In addition to increasing states’ investigatory powers, the Agriculture Department is asking e-commerce sites like eBay, Craigslist, Facebook (NASDAQ:FB), and Twitter to tell their users that selling benefits cards is illegal. Craigslist and eBay have told the government they are actively pulling ads that involved benefits cards sales.

Also in the works are plans to stiffen sanctions and penalties for retailers that engage in food stamp fraud, and plans to make sure that people disqualified from the program for illegal activity in one state are not able to receive food stamps in another.

About 850,000 people were investigated for food stamp fraud last year. Nearly 2,000 stores were sanctioned for illegal conduct, and 1,200 were permanently removed from the program. The vast majority of fraud cases occur at smaller stores. About 46 million Americans — nearly half of them children — receive food stamps, and 231,000 stores are authorized to participate in the program.

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